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There is a question in Kaplan exam kit namely Daikon Co (june 15), In this question examiner has used the term mark to market in Part B. kindly elaborated what this term means and how Part B of this question would be solved. Thank in advance.
As I explain in my free lectures, when a futures deal is started then a deposit (known as the margin) has to be paid to the broker (which is returned when the deal is closed, together with any gain or less any loss on the future).
While the deal is open, the price of the futures changes from day to day. Each day, if the futures are losing money then the margin has to be increased. If the futures are gaining then the deposit can be reduced.
In this question, the futures were bought on 1 June. On 2 June the price had fallen by 0.08% (95.84 – 95.76) and therefore the deposit would have to be increased by 50 (contracts) x $1,000,000 (contract size) x 0.08/400 (change in price) = $10,000
(The dividing by 400 is as we always do when calculating the gain or loss, because they are 3 month futures.)Alternatively, if you prefer to use ticks, the deposit will have to be increased by 50 (contracts) x 8 (the change in ticks) x $25 (the tick value) = $10,000.
It is the same logic on each of the following days.
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